Debunking The Top Ten Myths About International Distribution Agreements
Virtually every international distributor will ask for (or insist on) exclusivity. A frequent question in contract negotiations is whether you can or should give it to them. It’s an issue worth weighing carefully.
A story illustrates the danger of exclusivity. A New Jersey company appointed an exclusive distributor in Puerto Rico. After a great start, the distributor’s sales results dropped. Eventually, the supplier terminated him.
The distributor responded by demanding payment of five years’ worth of profits, pointing to something called Puerto Rico Law 75. The supplier refused, arguing that their written contract was governed by New Jersey law, which required no such payment.
After many discussions with a Puerto Rican lawyer (who should have been consulted before the agreement was signed), the American company realized that their island distributor would sue them in local courts and would almost certainly win his Law 75 payment—even though he failed to purchase agreed minimums under the contract.
Although an extreme example, many countries provide protection when local distributors are terminated. Thus, it’s not surprising that many suppliers think long and hard about granting exclusivity.
There is no single rule about granting exclusivity. It depends on the geography, local laws, what is customary in your industry, and practical business considerations.
The best we can do is set out some of the most common factors to consider.
Does local law permit the type and extent of exclusivity you are considering? Simply stating that the laws of New Jersey governs your contract is not sufficient. Exclusivity and goodwill payments upon termination are two areas where local law will often override anything you put in your distribution contract.
In some countries, true exclusivity is not possible. For example, the EU rules on distributor exclusivity surprise many suppliers. Since the EU is a common market, you cannot prohibit your Greek distributor from selling to customers in Italy, or Germany or anywhere else in the EU. This is an important consideration in pricing your products throughout the EU, as products priced lower for the Greek market will be attractive to customers elsewhere in European.
When granting exclusivity, it is expected to have minimum purchase requirements. You will still want to understand which these will be enforceable under local law, especially regarding “take or pay” minimum purchase provisions.
If a distributor insists on exclusivity, but is unwilling to agree to enforceable minimums, think long and hard before moving forward with this partner.
You will also need to weigh the practical and business considerations. In some cases, you may have no real choice on exclusivity. If there are only two qualified distributors in a market and your competitor already works with one, you have limited negotiating leverage. In other markets, you may have found the perfect distributor, but they may refuse to do business with you without exclusivity. In other markets and verticals, exclusivity is customary and a virtual necessity for doing business.
Are you are willing to invest in the distributor, and vice versa? When you give a distributor exclusivity, your options in that territory have become very limited, so be sure before you agree to exclusivity that both you and your distributor have agreed on the needed investments and what each of you will pay for.
Evaluate any exclusive distributor very carefully. Spend as much time with them as possible and do plenty of due diligence to make sure they are your best choice of partners.
Ensure that you contract allows you to terminate exclusivity without terminating the entire agreement. Although often difficult to manage from a relationship perspective, there may be advantages to continuing the distribution relationship, but without exclusivity.
Understand clearly the local law requirements for terminating exclusivity, including the grounds for termination and whether any payments will be due.
Doris Nagel is managing partner of Globalocity, and has over 25 years of hands-on global experience, focusing on strategic partnering, indirect sales channel management, and market entry. She’s a frequent speaker and author, and is currently working on a book on international distributor networks. Get a free excerpt from the book here.
Editor’s note: This is the sixth in a series of articles on Debunking The Top Ten Myths About International Distribution Agreements. Check out the previous articles in the series: